Message of Puerto Rico Debt Crisis: Easy Bets Sometimes Lose

Source: New York Times

Apartment and office buildings, many of them abandoned, in San Juan, P.R., in 2015. Congress enacted a law last year to help United States territories reduce debt. Credit Dennis M. Rivera Pichardo for The New York TimesWhen some of Wall Street’s savviest hedge funds piled into Puerto Rico’s debt in 2014, it seemed like an easy bet: Buy up the island’s bonds at a discount, pocket the high interest and persuade politicians to make decisions that would raise the value of their investments.

Even if Puerto Rico’s economy collapsed and its government unraveled, the investment funds figured they had an ace in hand. Puerto Rico was a United States commonwealth, and thus — like the 50 states — legally barred from declaring bankruptcy as a way to shed its debts.

But that safeguard was all but wiped out this week. On Wednesday, Puerto Rico essentially filed for bankruptcy in federal court, under a law Congress passed last summer to help the island cut its debt and escape financial calamity.